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Two analysts and top management from eleven sector firms examine the Real Estate/Property Services sector in this special 51-page issue from The Wall Street Transcript, available at (212/952-7433) or http://www.twst.com/info/info401.htm.

TWST: Steve, let’s start with the approach that you at Merrill Lynch take to investing in real estate investment trusts.

Mr. Sakwa: We obviously look at a lot of different things. Number one, we take a look at the property types that a company is in. Number two, we take a look at the fundamentals of the individual markets. Within the apartment and office markets, we’re obviously looking at supply/demand trends. Demand is a little bit harder to always gauge because it’s sensitive to economic changes. We have a much easier time getting a handle on the level of new supplies. So we spend a lot of time focusing on that. We obviously take a look at the valuation of the individual companies. We look at the balance sheets, we look at managements’ track records, and we put all of that into a pot and come up with different recommendations for different companies based on multiples and growth rates as well as dividends and projected dividend growth.

TWST: What’s your sense of the current valuations, and what, in your view, is an appropriate valuation for REITs?

Mr. Sakwa: We look at valuation a number of different ways. We look at price to adjusted FFO, which is akin to cash flow. We look at price to net asset value, and we also look at adjusted EBITDA multiples. Those three metrics allow us to look at companies in different ways. Some of them allow us to look at things on a leveraged basis, some of them allow us to look at things on an unleveraged basis so we can compare companies in sectors with different capital structures. Basically, what I would say is that the group is moderately undervalued at this point. It is hard to make the case that REITs are substantially undervalued like they were in early 2000. The group has had a very good run over the last 18 months, and I would say that the group is trading at 2, 3, or maybe 4 percentage points below what I’d call fair value today.

TWST: I saw one in Chicago that included a Restoration Hardware, a Crate & Barrel, and a Whole Foods Market, among other stores.

Mr. Sakwa: Yes. But these just aren’t going to work everywhere, so I think there will probably be some places in suburban Chicago and Washington, DC, and parts of Boston and New York and Los Angeles and the suburbs of Houston. But I don’t know that there will be that many in any particular market. It’s clearly been a big trend that we’ve been hearing about over the last couple of months. But we’ll see how many actually get built.

TWST: Are malls still being built?

Mr. Sakwa: They’re still being built but there are only a few being built each year. The Mills (NYSE:MLS) is another company that has been building a new concept in the mall industry. There are different Mills projects: Franklin Mills, Potomac Mills, Sawgrass Mills. They’re all from the same company and, basically, they are super-regional malls that combine traditional mall tenants with factory outlet tenants with neighborhood shopping center tenants plus a component of entertainment. So it’s really created a different shopping experience, and they’re targeting one of these malls for each major city. I don’t think you can have lots of these in each city, but certainly a city like Dallas could have two if they were on completely opposite ends of the city.

This special issue includes:

1) Property Services - In an in-depth (3,600 words) Analyst Interview, Jay Leupp, Managing Director and Senior Real Estate Equity Analyst at Robertson Stephens, examines the outlook for the sector and shares specific stock recommendations.

2) Outlook for REITs - In an in-depth (3,800 words) Analyst Interview, Steve Sakwa, Senior Analyst in the Global Securities Research and Economic Group at Merrill Lynch, examines the outlook for the sector and shares specific stock recommendations.

3) CEO interviews (average 2,500 words). Top management of eleven sector firms examine the outlook for their firm and the sector.